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Is Dilbit Oil? Congress and the IRS Say No

Dilbit is exempt from an oil tax that is used to clean up conventional crude and dilbit spills. The exemption is worth $35 million a year, and growing.

Jul 31, 2012
Submerged oil recovery on the Kalamazoo, June 2011

The oil industry has often said that dilbit, a heavy crude oil from Canada's tar sands, isn't much different from conventional crude oil. But when it comes to paying into a federal fund used to clean up oil spills, it's different enough to deserve a sizeable tax break.

Dilbit is exempt from the tax, because the 1980 legislation that created the tax states that "the term crude oil does not include synthetic petroleum, e.g., shale oil, liquids from coal, tar sands, or biomass..."

The Internal Revenue Service cited that 1980 text in a 2011 memo that confirmed the exemption for at least one company.

The tax helps support the federal Oil Spill Liability Trust Fund, whose primary funding comes from an 8-cent-per-barrel excise tax on domestically produced and imported crude oil and on imported refined products such as gasoline. 

Money from the fund is helping to clean up the 2010 oil spill in Michigan, where a ruptured pipeline spewed more than 1 million barrels of diluted bitumen, or dilbit, into the Kalamazoo River. Unlike conventional crude oil, which floats on water, much of the dilbit sank into the river. Removing it has been so difficult that cleanup crews are still struggling to mop it up, making the Michigan disaster the most expensive oil pipeline spill in U.S. history.

The accident has cost $809 million so far, with $765 million paid by Enbridge, Inc.—the Canadian company whose pipeline ruptured—and its insurance company. The remaining $44 million is coming from the fund.

The nation's refineries pay the excise tax for imported crude oil, and these fees are considered standard practice in industry, said Esa Ramasamy, an editorial director at Platts, a global energy, petrochemicals and metals information provider. "It is accepted as part of the daily business routine. It's like an insurance policy ... [for] anything that can harm the environment."

Ramasamy said the 1980 definition of crude oil dates back to a time when it wasn't financially feasible to produce tar sands oil on a large scale. The first sizeable shipments of dilbit into the U.S. didn't occur until 1999.

Tar sands production is now "a huge industry," he said, and Congress didn't expect that when the tax was created.

The U.S. currently imports more than 1.2 million barrels of Canadian dilbit and synthetic crude (another kind of tar sands oil) per day. The tax exemption is worth at least $35 million a year, and that figure will grow as the industry seeks to build thousands of miles of new pipelines—including the much-debated Keystone XL—to handle increased imports.

Watchdog and environmental groups say it makes no sense to exempt tar sands oil from a tax that is used to clean up tar sands spills.

"The key issue is, is tar sands crude oil?...When it comes to taxes, [the industry] get[s] to make the argument that tar sands isn't crude oil," said Anthony Swift, an attorney at the Natural Resources Defense Council who has spent years advocating for better pipeline safety. "But when it comes to the safety of moving tar sands in pipelines, they say it's just like crude oil."

Swift and other watchdogs say the exemption is particularly galling because dilbit is more corrosive to pipelines than conventional crude—something that the industry disputes.

"The question is why we should continue this exemption given that it's clear tar sands oil is more likely to spill because it's more corrosive...and more and more tar sands is coming into the U.S.," said Lorne Stockman, research director at Oil Change International, an advocacy group that supports clean energy.

The National Academy of Sciences has launched a study on dilbit and pipeline corrosion, but it will be limited to a review of the existing literature and won't involve any new research.

Ramasamy, the Platts oil expert, said tar sands imports might be subject to some other kind of environmental tax.

"Oil sands tend to be more acidic and corrosive than conventional crude," he said. "It takes a special kind of refinery to process them, because of the toxicity of [the] crudes. So I find it hard to believe there is no environmental tax on those crudes."

An IRS spokesman said he could not provide information about other taxes the industry might by paying. InsideClimate News also contacted three pipeline companies (TransCanada, Enbridge and Kinder Morgan), three refineries that process tar sands crude (Valero, Suncor Energy U.S.A. and BP Whiting), and the Canadian Association of Petroleum Producers (CAPP) to ask about possible taxes on tar sands imports.

Spokesmen from TransCanada and CAPP said questions about tax policy should be directed to tar sands refiners, producers or the IRS. Enbridge, Kinder Morgan and the refineries did not respond.

A Convoluted History

Some of the confusion over the excise tax can be traced to the Trust Fund's convoluted history.

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